Chesapeake’s $1.2 bn loans rely on dwindling output

Output from 3,300 Chesapeake-operated wells in the Sahara field of northern Oklahoma was 12% below projections during the six-month period ending in February, Moody’s Investors Service said in a note to clients yesterday. As a result, the so-called production coverage ratio on the Glenn Pool Oil & Gas Trust five-year loan and 10-year notes declined to 1.18 from 1.29, the credit-rating firm said.

Chesapeake, the second-largest U.S. gas producer, borrowed $880 million from Barclays Plc in May 2011 under a pair of agreements that repay the loans with future supplies of gas, crude oil and gas byproducts. Three months ago the credit agency downgraded ratings on $360 million in Chesapeake borrowings backed by wells in the Barnett shale.

Chesapeake’s overall production growth slowed to 3.4% in 2013 after growing at double-digit rates in 11 of the prior 12 years, according to data compiled by Bloomberg.

CEO Doug Lawler, appointed last year after co-founder Aubrey McClendon was fired, has been shifting investment and drilling rigs to higher-profit oilfields after a glut of North American gas collapsed prices and forced the Oklahoma City-based company to sell billions of dollars in assets to avoid a cash crunch.

The stock fell 0.2% to $25.19 at 12:38 p.m. in New York. Since Lawler’s appointment in June, Chesapeake has increased 20%, outperforming the Standard & Poor’s 500 Index and gas futures on the New York Mercantile Exchange.

Volumetric production payments, or VPPs, were a favorite financing device of McClendon and CFO Domenic Dell’Osso, one of the few high-level executive holdovers from the McClendon era. The company, which outspent cash flow in 21 of the past 23 years, had nine outstanding VPPs at the end of last year that raised $6.03 billion for the company, according to a U.S. Securities and Exchange Commission filing.

Dell’Osso characterized the Glenn Pool VPP as “another great transaction,” during a May 2011 conference call.

Moody’s downgraded ratings on three classes of loans backed by output from Chesapeake wells in the Barnett shale gas formation in north Texas in December, citing gas production that was 11% below projections. The six-month average coverage ratio was 1.1 at the time, compared with a projected ratio of 1.28, Moody’s said in a note on Dec. 17.